Mangal Compu BSE SME IPO review (Avoid)

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Review By Dilip Davda on November 7, 2024

•    The company is engaged in the business of providing IT hardware solutions and related services.
•    It posted inconsistency in its top and bottom lines for the reported periods. 
•    It is operating in a highly competitive and fragmented segment.
•    Based on annualized FY25 earnings, the issue appears fully priced. 
•    There is no harm in skipping this "High Risk/Low Return" fully priced bet.

ABOUT COMPANY:
Mangal Compusolution Ltd. (MCL) is engaged in delivering comprehensive IT hardware solutions designed to meet the ever-evolving technology needs of businesses across various industries. With a major focus on the rental of IT hardware, it strives to provide top-tier equipment and services that empower organizations to thrive in the digital age. 

The company is actively involved in the business of renting and selling IT hardware equipment, offering comprehensive end-to-end IT equipment. Although it is servicing clients across India, however, Maharashtra region accounts for major source of revenue, for the quarter ended June 30, 2024, Maharashtra region accounted for 96.87% of the total revenue. Its services encompass the rental of a diverse range of IT equipment, including servers, laptops, desktops, projectors, router-switches, workstations, Plasma/LCD TVs, PA Systems, and various accessories. Additionally, MCL specialize in creating customized IT configurations tailored to clients' specific specifications and needs, available for both rental and purchase.

Its rental services offer businesses the flexibility to scale their IT infrastructure as needed. It caters to both small as well as large enterprises, its IT hardware products, including laptops, desktops, servers, and other IT equipment, can be tailored to meet specific requirements of the clients. This scalability allows the clients to adapt to changing workloads, seasonal demands, or project-specific needs without the burden of long-term hardware ownership. MCL's IT rental services provide customers with valuable flexibility and advantages, enabling them to conserve capital expenditure (CAPEX), realize tax benefits through the adjustment of rental expenses from gross profit, and significantly, avoid technological obsolescence. Furthermore, it also offers new and pre-owned IT equipment to clients based on their requirements. It understands that the process of setting up and deploying IT hardware can be time-consuming and complex. To simplify this process, it provides on-site setup and deployment services. 

In addition to offering IT equipment for rental, it also provides on-site support and maintenance services. It has on board team of 8 personnel who have average experience of approximately 10 years in computer hardware field, which enables the company to execute projects with precision, adhering closely to clients' specifications and requirements. This dedication to excellence has established it as a dependable and trusted partner for clients, driving to continuously broaden its service offerings.

MCL's Products includes a wide array of desktops, laptops, and presentation equipment for short- and long-term business needs. It exclusively rent top-tier IT equipment brands such as IBM, Dell, HP, Lenovo, Sony, Apple, Compaq, and Toshiba, ensuring seamless compatibility of software with the rented machines and a seamless integration with clients' existing branded equipment. As of September 30, 2024, it had 26 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden IPO of 3606000 equity shares of Rs. 10 each at a fixed price of Rs. 45 per share to mobilize Rs. 16.23 cr. The issue opens for subscription on November 12, 2024, and will close on November 14, 2024. The minimum number of shares to be applied is for 3000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 26.50% of the post-IPO paid-up capital of the company. The company is spending Rs. 1.33 cr. for this IPO process, and from the net proceeds of the IPO, the company will utilize Rs. 12.96 cr. for capital expenditure, and Rs. 1.94 cr. for general corporate purposes. 

The IPO is solely lead managed by Jawa Capital Services Pvt. Ltd., and KFin Technologies Ltd. is the registrar to the issue. Rikhav Securities Ltd., is the Market Maker for the company. The issue is underwritten 84.94% by Aftertrade Broking and 15.06% by Jawa Capital. 

After issuing initial equity shares at par value, the company has issued bonus shares in the ratio of 4 for 1 in August 2023. The average cost of acquisition of shares by the promoters is Rs. 6.00, and Rs. 9.00 per share.

Post-IPO, company's current paid-up equity capital of Rs. 10.00 cr. (10000000 shares) will stand enhanced to Rs. 13.61 cr. (13606000 shares). Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 61.23 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 18.49 cr. / Rs. 0.87 cr. (FY22), Rs. 34.83 cr. / Rs. 7.04 cr. (FY23), and Rs. 23.44 cr. / Rs. 3.86 cr. (FY24). For Q1 of FY25 ended on June 30, 2024, it earned a net profit of Rs. 0.81 cr. on a total income of Rs. 4.53 cr. Thus the company has reported inconsistency in its top and bottom lines for the reported periods. 

For the last three fiscals, the company has reported an average EPS of Rs. 4.42 and an average RoNW of 25.79%. The issue is priced at a P/BV of 2.16 based on its NAV of Rs. 20.81 as of June 30, 2024, and at a P/BV of 1.65 based on its post-IPO NAV of Rs. 27.22 per share. 

If we attribute FY25 annualized earnings on post-IPO fully diluted equity capital, then the asking price is at a P/E of 18.91. The issue relatively appears fully priced.

For the reported periods, the company has posted PAT margins of 5.03% (FY22), 40.28 % (FY23), 18.47% (FY24), 19.82% (Q1-FY25), and RoCE margins of 1.99%, 16.50%, 9.55%, 2.05%, respectively for the referred periods. 

According to the management, FY23 top and bottom lines includes other income and exceptional items along with other accounting adjustments. If we remove it, then the performance is on an average with marginal growth. Repeat orders/extension of rental are done at more discount and is thus denting its bottom lines.

DIVIDEND POLICY:
The company has not paid any dividends for the reported periods of the offer document. It will adopt a prudent dividend policy post listing, based on its financial performance and future prospects. 

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown Silicon Rental Solution as its listed peer. It is trading at a P/E of 22.9 (as of November 07, 2024). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 4th mandate from Jawa Capital in the ongoing fiscal.  From the 3 listings so far, 2 opened at discount, and the rest opened with 50.00% premium on the date of listing.

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